• VINCIA CLOETENO MATTER how much attention a board gives to succession planning for the leadership of the company, a board should anticipate that at some point a chief executive officer change will occur unexpectedly.
This may occur because the chief executive decides to pursue another opportunity, becomes incapacitated or dies, or is sacked for “cause” such as underperformance, an ethical lapse or violation of law.
A board’s decision as to whether, when and how to terminate the employment of a chief executive and hire a successor is among the most critical decisions facing the board of any company. How well the board of directors handle a leadership transition can have a direct impact on the company’s success. The situation is further convoluted by contractual, regulatory and personal factors.
Unwieldy transitions and botched succession candidates leave a company vulnerable to media scrutiny and shareholder activism. By contrast, smooth, thoughtful leadership transitions can provide performance impetus.
When the surprise of a sudden chief executive termination hits, the board seized with the plight must quickly marshal the facts and rapidly assimilate the legal landscape. A protracted fight with a beleaguered chief executive in the public eye is undesirable.
Best practice recommends succession planning to prepare for both scheduled and unscheduled transitions, the latter which elicits emergency succession planning. This is not the same as having a succession plan which represents the measures needed to deal with an expected departure. Emergency succession planning is often included in the larger scheme of succession planning but it need not wait for a broader plan – it is often an imperative first step.
Emergency succession comprises certain considerations.
The board should reflect whether the termination will be styled as a resignation, termination or retirement – at this stage one or two board members typically meet with the chief executive and explain that a majority of the directors believe that resignation is desirable, and describe the potential action that the board may take unless an agreement can be reached on the terms and timing of a resignation.
Further, the board must determine the chief executive’s entitlements to severance, pension and deferred compensation enhancements, vesting of equity or other benefits (such as continuation of medical coverage or perquisites) and the cost of those entitlements under the possible termination scenarios. The board should be advised by labour, human resources and tax advisers, as appropriate.
Potential successors need to be identified – if an internal candidate has been identified as the successor in either an interim or a permanent capacity, that candidate needs to be informed of the situation on a highly confidential basis early on. Consider the possibility that other well-qualified internal candidates may resign if not selected as the next chief executive.
Determine whether the departing chief executive’s continued assistance is needed for any transition period/purposes (whether as a consultant or employee), whether the nature of the transition presents any special challenges for the new chief executive and what extra assistance the new chief executive may require as a result.
If the chief executive is also a director, determine whether he/she will resign from the board or remain for some period or indefinitely.
Evaluate whether any active or anticipated litigations require the chief executive’s testimony or involvement. Consider in this regard whether the chief executive is already bound by a cooperation clause (or whether one should be included in a consulting, transition or separation agreement).
If necessary, establish a protocol for removing the chief executive from the building and disconnecting all access points to company technology simultaneously with the communication of the termination to the chief executive. By contrast, continued access to company systems (on a full or limited basis) may be necessary during any transition period.
Evaluate the potential effects of replacing the chief executive on key agreements and critical relationships and how to manage those impacts. Correspondingly, determine whether the chief executive has any knowledge of ongoing projects that must be passed on to others prior to departure.
Consider the public statement, if any, to be made in connection with the departure of the chief executive and whether the content of that statement will be negotiated with the departing chief executive.
Generally, any decision to terminate the chief executive officer’s tenure should be made by majority vote and not by the chairperson alone. Assigning individuals to the proper roles in a chief executive termination scenario is also crucial to a successful process –their workload, personal relationships and confidentiality should be regarded.
Ideally, boards should rely on external counsel to collect and review all relevant documents to advise on each party’s contractual entitlements and obligations upon a termination — or to prepare how to proceed where, as is sometimes the case, not all relevant documents are available. Attention should also be given to who might advise on public relations and investor relations, if needed. If there is no readily apparent successor candidate, a recruiting firm may also be needed to work on an expedited basis. In some circumstances it may be necessary to also reach out to a crisis management firm, preferably one that can provide interim leadership.
Importantly, the board will need to identify and understand the procedural requirements for effecting the termination, including, if applicable, removal from the board. Advance notice of a termination may be required, especially under an employment agreement. Additional requirements may apply before a termination for “cause” may be effected, which often include a notice and an opportunity for a formal hearing prior to any termination for “cause”.
There are numerous decisions to be made and factors to be considered in a chief executive termination. It is crucial for boards to be aware of the full menu of these considerations, consider them early in the process, have a clear understanding of how required decisions will be made and comprehend how each decision will impact the overall dynamics of the chief executive termination process. It is central to recognise and follow good corporate governance procedures. Naturally, prospective chief executive officer succession planning is preferred to an emergency process, such as described above, and boards should take keen interest in inaugurating the former.
